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What happens to Big Oil's WACC

Refer to problem 18. Suppose Big Oil borrows an additional $200 million from the bank, paying 12.6 percent interest. It then pays out a special $200 million dividend, leaving its assets and operations unchanged.
What happens to Big Oil's WACC, still assuming it pays no taxes? What happens to the cost of equity?

Solution

Problem 11-19
Instructions

Recalculate the WACC based on the new debt.

Before the additional bank loan

Security Type Amount Proportions Rate WACC
Debt $386 24.32% 9.00% 2.19%
Common stock 1,200 75.68% 13.50% 10.22%
Total $1,586 12.41%

After the additional bank loan

Security Type Amount Proportions Rate WACC
Debt $386 24.32% 9.00% 2.19%
New debt FORMULA 0.00%
Common stock 1,200 75.68% 13.50% 10.22%
Total $1,586 12.41%

Solution Summary

The solution explains what happens to Big Oil's WACC assuming it pays no taxes. What happens to the cost equity is given in the solution.

$2.19